Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing services.

2016: Goldman Sachs on Stocks, Warren Buffett on Optimism

Goldman sees the market treading water next year but likes stocks with a high total cash return.

U.S. stocks are little changed in early Tuesday afternoon trading, with the Dow Jones Industrial Average (DJINDICES:^DJI) and the S&P 500 (SNPINDEX:^GSPC) up 0.01% and down 0.12%, respectively, at 12:30 p.m. EST.

Goldman Sachs believes stocks with a high total cash return will outperform in 2016.

Here's the bad news for investors: According to Goldman Sachs, stocks will go nowhere next year. In the investment bank's stock market outlook for 2016, published today, chief U.S. equity strategist David Kostin writes:

We forecast the S&P 500 index will tread water for a second consecutive year in 2016. Our year-end 2016 target of 2100 represents a 1% price gain from the current index level (2089), which itself is just 1% above the year-end 2014 level of 2059. Including dividends, we expect the total return in 2016 will equal 3%.

The report presents serious-sounding arguments and plenty of data to support that forecast, but what it doesn't say is that the forecast is essentially worthless because the forecast period is so short. That's right, friends: Even in a world of millisecond latency, one year is still the short term when it comes to equity investing.

Consider, for example, that the standard deviation of stocks' annual total return over the period 1928 through 2014 is just shy of 20% (based on data from New York University's Aswath Damodaran). In other words, standard deviation completely swamps their long-term average annual return (9.6% over the period), as well as Goldman's 3% forecast.

(The standard deviation is a measure of how dispersed a set of data are around their average; a higher standard deviation indicates wider dispersion.)

Not to worry. Goldman is also ready with a bewildering array of themes to outperform in 2016 (megacap, momentum, companies with high U.S. sales, etc), including one that actually seems like a decent long-term strategy. As Kostin wrote:

Stocks with high total cash returns will outperform in 2016 despite the bear flattening yield curve environment ... . The muted pace of economic expansion in the U.S., the uncertain prospects for global growth, and a low expected S&P 500 return, will leave investors searching for yield.

(Total cash return refers to the sum of the dividend yield and the buyback yield, the two means by which companies can return cash to shareholders.)

As far as the strategy's long-term credentials, this is what Kostin had to say on CNBC this morning:

Historically speaking, it's been a great strategy for the last 20 years. Seventy percent of the time in the last 20 years, the market has rewarded those companies that have returned cash -- dividends and buybacks -- as compared with those companies that are investing in [capital expenditures] or pursuing M&A.

In its report, Goldman put together a total cash return basket of 50 stocks. The five stocks with the highest total cash return in increasing order are: CBS Corporation, Bed Bath and Beyond, Motorola Solutions Inc, Juniper Networks, and KLA-Tencor Corp. I like the thinking behind the high cash return strategy, but I must confess I'm a bit underwhelmed by those five names.

Another way I like to inoculate myself against short-term thinking is to listen to an investor who has been around for 85 years and has been pretty successful over the course of a half-century-plus investing career. A few days ago, Berkshire Hathaway CEO Warren Buffett told Yahoo! Finance:

How can you not be optimistic? If I'd been born 200 years ago, my life would have been just a tiny, tiny, tiny fraction of what it is now. Every time I get in a dentist chair, I'm thankful it wasn't 100 years ago. They would've been pouring whiskey down me and holding me down. Everything: Medicine, education, you know, just the conveniences of the life, transportation, entertainment. Everything is dramatically better than it was 50 years ago.

In fact, I tell the students, these students in that class today are actually living better than John D. Rockefeller Senior lived when I was born. Here was the richest man in the world -- he could not travel as well as they can travel, he could not be entertained as well as they can be entertained, he did not have the medicine they have. In all kinds of ways, they're living better than the richest man in the world lived at the time of my birth. The luckiest group of babies ever born in the world are the babies being born in the United States today.

That sounds like something worth being thankful for as we approach Thanksgiving and look toward 2016.